AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Lubbock, Texas' limited tax debt:
--$13.865 million general obligation (GO) bonds, series 2011 at 'AA+'
--$16.265 million GO refunding bonds, series 2011 at 'AA+';
--$118.45 million tax and waterworks system surplus revenue certificates of obligation (CO), series 2011 at 'AA+'.
The bonds are scheduled to sell via negotiation on March 15, 2011. Proceeds will be used for various public improvements and to refund outstanding obligations for debt service savings and to pay issuance costs.
In addition, Fitch affirms the following ratings:
--Approximately $967 million in outstanding limited tax bonds at 'AA+'.
RATING RATIONALE:
--The city's financial management remains strong as evidenced by the maintenance of stable general fund reserves despite recent fiscal pressures related to the economic downturn.
--Although the city has experienced economic contraction in the past 12 months, the local economy remains healthy, given the city's position as a regional business, education, and medical center.
--Aided by significant self-supporting debt, the city's direct tax-supported debt burden remains moderate but continues to grow as it implements a large capital improvement plan (CIP) over the next several years. The city has begun to impose significant water, sewer, and storm water rate increases in support of these projects.
--The pace of principal debt retirement is above average but may slow given the city's plans to issue significant additional debt, primarily for its utilities' capital needs.
--The financial position of the city's utility, Lubbock Power & Light (LP&L), has improved, minimizing its potential impact on the city's general fund.
--Utility revenue transfers account for roughly 15% of total general fund resources.
KEY RATING DRIVERS:
--Maintenance of solid financial reserves given growing pension costs and the city's reliance on economically sensitive sales tax revenues as largest source for general operations.
--Ability of city's utility funds to fully support very large CIP.
SECURITY:
The GOs are payable from a direct annual ad valorem tax levied, limited to $2.50 per $100 assessed valuation, against all taxable property within the city. The COs are payable from the same source as the GOs and are additionally payable from a pledge of surplus net revenues of the city's waterworks system.
CREDIT SUMMARY:
With an estimated population of nearly 230,000, the city is located in west Texas and covers about 119 square miles in Lubbock County. Two of Lubbock's major economic indicators, its unemployment rate and taxable assessed valuation (TAV), are performing well. The latest projected unemployment rate was a modest 5.6% for December 2010, well below the Texas (8%) and national (9.1%) averages for the same month. TAV gains have moderated over the last two fiscal years; nonetheless, TAV continued to show year over year gains at an annual average rate of 5.3% over the past five fiscal years. The city's TAV for fiscal 2011 is solid at $12.3 billion and prospects for continued growth remain favorable. More than 60 residential and commercial developments are under way in the city, a portion of which is expected to add as much as $3 billion in new TAV over the next 10-15 years. However, not insulated from the economic slowdown, the city's residential and non-residential building permit issues have declined notably.
The city's financial position remains stable, aided by transfers from the city owned enterprises and management's continued attention to cost control and conservative budgeting during this economic slowdown. Sales taxes comprise the largest general fund resource accounting for 36% in fiscal 2009, followed by property taxes (28%) and transfers from enterprises (15%). Transfers from LP&L resumed in fiscal 2008 after the utility improved its operating margins from earlier in the decade when LP&L financial troubles resulted in the depletion of general fund reserves in 2003.
Over the last five years leading into fiscal 2010, the city has maintained unreserved general fund balance at slightly under $20 million annually, while investing a total of $28 million in cash outlays for capital projects. For fiscal 2009 audited results show a modest $81,000 drawdown of general fund reserves despite funding about $8 million in cash for capital outlays. Another important factor supporting positive results for fiscal 2009 was the city's decision to take advantage of an eight-year amortization schedule offered by the state to fund the increase in the annual required contribution (ARC) for pensions. Following changes to assumptions in the Texas Municipal Retirement System, participants experienced significant increases to the ARC in fiscal 2009.
For fiscal 2010, the city anticipates drawing down another $74,000 to close the year with unreserved general fund balance at $19.7 million, or 18.7% of total general fund revenues (remaining just under the city's fund balance goal of 20% of operating revenues). The fiscal 2011 budget is balanced, based on flat sales tax growth and an increased level of utility transfers. Interim results for fiscal 2011 point to roughly break-even results.
The city's debt burden is on the rise due to the ongoing implementation of its capital plan. Direct debt ratios at just over $1,600 per capita and 2.8% of market value (MV) remain moderate. When debt from overlapping municipal entities is included, the debt burden rises to about $3,200 per capita and 5.6% of MV. Amortization is above average with nearly 61% of principal retired in 10 years. The city's pension funding position was impacted over the last two fiscal years due mostly to changes in actuarial assumptions. The funded ratio for civic personnel is considered relatively weak at 61% and its unfunded actuarial accrued liability as a percent of market value is slightly over 1%. Fitch believes that the pension obligations may apply some pressure on the city's resources over time.
The city continues to implement a large CIP. The city's five-year CIP for fiscal years 2012 through 2016 totals about $410 million (excluding the electric utility). Approximately 90% of the projects are planned to be debt financed with self-supported debt mostly of the water, wastewater, and drainage utilities. To support the water and wastewater CIP, the city has recently implemented significant rate increases, including a 41% rate increase in fiscal 2009 for high volume water users. Future projected rate increases through fiscal 2015 range from 10%-12% for water and 15% for wastewater. Storm water rate increases are also significant, ranging from 22%-50% in annual hikes in fiscal years 2010-2012, stemming from the reallocation of street maintenance debt service from the interest and sinking fund to the storm water fund. The city plans to sell an additional $18 million GO bonds and an estimated $80 million COs within the next 12 months.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, and LoanPerformance, Inc.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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